The Governor of the Commonwealth of Puerto Rico, Alejandro Garcia Padilla, is crying wolf amid an ongoing – and deepening – debt crisis.

The island’s taxpayers are on the hook to pay back a whopping $49.2 billion in debt.

Actually, Puerto Rico has about $73 billion in debt – but a big slice of the debt pie belongs to its troubled utility company, as well as other government entities.

Thus, the island’s obligated bond payments continue to swell.

Currently, around 36% of Puerto Rico’s revenue services its debt payments (versus 7% in the United States), but the island says it can’t afford to pay more than 15%.

In a meeting with lawmakers in Washington, Padilla said the island is in a “death spiral” and that “the U.S. faces a humanitarian crisis under its own flag if Congress does not act soon.”

Recently, Puerto Rico has been moving money from one pocket just to pay another, something Padilla blatantly admitted when he said that the government has “paid their creditors up to now with ‘fiscal gymnastics’ but we have no more tricks.”

Kicking the Can

Padilla, who has repeatedly stated that Puerto Rico can’t pay back all of the debt it owes to creditors, has now proposed cutting that debt by almost half, to $26.5 billion.

In its proposal, Puerto Rico asks creditors to voluntarily exchange their current bond for two new ones in a restructuring deal involving a 46% reduction of debt.

That means the $49.2 billion the island owes will be split into two tranches. The first $26.4 billion “base” bond will pay guaranteed interest while the $22.7 billion “growth” bond only pays out if it meets its revenue and growth threshold.

But Puerto Rico is so short of funds that it has already defaulted twice before, in August and early January, and now it’s trying to kick the can even further down the debt road.

Puerto Rico’s government argues that by not having to pay existing creditors now, it can trim the debt, pay school teachers and police, and get the economy growing again.

But that may be tough to do, especially because Puerto Rick is facing a serious “brain drain.” Many Puerto Ricans are migrating to the mainland United States in search of better opportunities and economic conditions.

Today, over 700,000 Puerto Ricans live in New York City – almost twice as many as in San Juan. Padilla stated in a tone of desperation, “This is mathematical – this is not politics, this is a real crisis.”

But Wait, There’s More…

Yet the situation is indeed highly political – especially since it’s an election year in the United States.

There’s one big road block, however, in the Republican debt path: Some lawmakers would require financial statements prior to providing assistance, and Puerto Rico has been delinquent in producing them.

Meanwhile, Senator Elizabeth Warren (D-MA) pejoratively called those entities holding Puerto Rican debt “Vulture Funds,” even though the debt is widespread and held by many creditor pools.

Some of the debt is owned by hedge funds, but a lot is held by individual investors who bought the bonds, are invested in funds holding Puerto Rican debt, or own it through their pension funds.

Mutual funds such as Franklin Templeton and Oppenheimer Funds hold substantial amounts of the Puerto Rico Electric Power Authority’s debt. Fund investors have lobbied against Chapter 9, believing that it would retroactively violate the terms of the prospectus, and their portfolios would take a hit.

No Mambo, No Cha-Cha-Cha

Ultimately, no one will be dancing until this crisis is resolved, and it’s likely to end up in a lengthy court battle unless Washington politicians step in and negotiate.

Of course, if there’s not enough money to eventually pay off the debt, then we’re simply delaying Puerto Rico’s day of reckoning.

In fact, the aforementioned “growth” bond has been coined the “hope” bond due to the skepticism surrounding debt payment. As we all know, hope isn’t a strategy, and calling it a “wishful thinking” bond doesn’t bode well for institutional bond dealers.

Unfortunately for debt holders, this situation is worlds apart from Detroit, where $0.20 on the dollar eventually turned into $0.74. In fact, Puerto Rico is looking less like Detroit and more like Greece, particularly because it’s faced with an ugly 60% tax evasion rate.

Investors that are already in should sit tight and, believe it or not, be hopeful. But for everyone else, it will likely pay to wait before diving in with the vultures.

Comments (13)

Luis Fortuño was Puerto Rico’s last hope. When his term as Governor ended, so did any chance of rescuing Puerto Rico. The unions did not want to give up anything to help the economy of Puerto Rico, and the populace followed them blindly. It would be better now to pull the plug, rather than continuing to sink money into this cesspool.

I see that you did not use your real name in your comments. I’m sure your wife would kick your butt if she found out. I guess you are living in a fantasy world, there are no corrupt politicians anywhere in the U.S. The U.S. has 18 trillion dollars in debt that will never be able to pay either. Puerto Rico’s economy went down the drain over 20 yrs ago when American industry abandoned the island when their tax subsidies ran out and ran to Mexico and China looking for cheap labor. Now our American Dollars are going to run to Cuba where a communist corrupt government is going to benefit. Puerto Ricans are US citizens and should be treated the same as any other U.S. citizens and offered the same protections. We bailed out American banks, GM and Chrysler in the past. Why not 3.5 million citizens of the United States.

It’ s really very simple: Allow PR to default, and then reset. Sometime’s the lessons learned hardest stick around the longest. Lesson: You can’t borrow money that you have no ability to repay, and if you do, you will eventually be brought to task for that mistake.

It’s time to face up to this mistake. You’ve not longer run out of cans to kick, you’ve run out of road to kick them down.

I think the only thing Puerto Rico can do is to file bankruptcy and sell off all of the Puerto Rican businesses to private enterprise. It’s been proven that the Government can’t be in charge of any type of business anywhere and in the end the outgo exceeds the intake. This always happens and is now happening in the United States mainland, in States like California and others. I live in Indiana, and Indiana is in the black due to the last 2 Governors who were business people before they were Governors and the Democrats hate them because we are living within our means.

Good post Dale: I haven’t been following any particular political landscape of Indiana (I live in Arizona). So who and what 2 prior Governors structured your state? Democrat or Republican? Who is Governor now and what party? I know I could google it but I figure you have the answers right at your finger tips.

It’s great to finally read some positive news about a state and it sounds like, from what you say, Indiana should get a ‘Gold Star!’

I’m Puerto Rican. Sad, but I have to agree 100% with all did you just had said. Like someone else commented Luis Fortuno was Puerto Rico’s last hope. Now the only thing that will save the island is file for bankruptcy, and sell off all their businesses under their control to private enterprises.

It is interesting that the Democrats now favor chapter 9 bankruptcy for Puerto Rico, but not a peep when Obama performed special favors to prevent bankruptcy for GM. Must be no unions to suck up to in PR.

We just moved to Florida after 28 yrs,watching the debt grow and the ‘buzz’ on the street was/is..”oh, it will be ok soon, like always” The “Titanic that’s Puerto Rico” has been sinking for 70+ years.
Your artical is right on…We’ll watch the fiscal water fill the Lido Deck.

Until PR can be self sufficient in production of goods and services, it will continue to be a dependent entity requiring subsidies through freebees, gifts, and in this case creditors’ discounts. So, get out the sissors, a haircut is about to begin unless you wish to make greedy investors who sought to avoid federal and state taxes, whole by US taxpayers.

How many times has Puerto Rico declined statehood? They want all the rights of a state without being one. PR is one of the largest receivers of welfare benefits from the USA if not the largest….There are hard consequences to choices. NO bailouts!!

Machine-learning algorithms are cleverly downloading faces from social media pages like Facebook… and then uploading those faces to unsavory videos. This is the latest example of technology moving faster than our moral ability to use it.

One mystery trader just rolled over a massive volatility bet that could pay out $260 million if he’s right again. Can you blame him? He’s got seven-plus years of the bull trend on his side. Well, none of that means squat if you’re Goldman Sachs.